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Traders in the financial industry use an exponential moving average (EMA) as a technical indicator to study the price charts of foreign currency, commodities, stocks and other financial products. For the Forex exponential moving average, more emphasis is placed on the latest prices in the calculation, so it’s more than just a formula for a simple average. Many Forex trading strategies are designed to work from different EMA combinations. Read on to find out more.

In trading terms, a moving average indicator is used to summarize different prices during a certain time period. This information is then reflected as a line on a bar chart that the trader can view easily on a computer screen. Since the EMA indicator will give more weight to the latest price actions, the average provided will be skewed towards the current market conditions.

Basically, this indicator would average the prices of several recent bars on the Forex chart and then plot the results on the current bar. Every bar will recalculate this average and the results will be connected by a line to establish the moving average. This will show how the average prices change over time.

When calculating an exponential moving average, you would need a simple moving average (SMA). Since a SMA lacks a skewing factor, the closing price during a certain period can be provided as a visual representation. Forex charting software can provide a mathematical calculation to help you to change a SMA to an EMA. Bear in mind that short-term moving averages usually focus more on recent prices, unlike the longer term averages.

The main benefit of the Forex exponential moving average indicator would be its visual simplicity. Based on the direction of this tool, it is easy for traders to quickly calculate the prevailing trend of the price action. Of course, this must be done carefully because the EMA is actually a lagging indicator that might not adjust quickly to market volatility.

EMA Crosses

Many EMA-based trading strategies for Forex rely on the concept of putting two or more indicators on the chart and then wait around until the lines cross. There are many traders who are using these crosses when creating trading systems. When using an EMA crosses strategy for Forex, the traders can visually identify a time when the balance between selling and buying changes and know if the market sentiments is likely to continue on that course for a while.

Whether you are using Forex exponential moving average or some other method, you should know that no strategy is perfect. A trader’s success usually lies more in discipline and money management, rather than the strategies used for trading. However, the EMA has proven to be an excellent strategy for those who want to make money in the Forex markets.

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